By Max Colchester 

LONDON-- Lloyds Banking Group PLC on Friday announced its first full-year net profit and dividend payout since the U.K. lender was bailed out during the financial crisis.

The bank, which is 24% owned by the U.K. government, posted a GBP1.13 billion ($1.74 billion) net profit for 2014, compared with a net loss of GBP838 million a year earlier, buoyed by falling costs and an improving British economy. Lloyds's board received clearance from regulators to recommend a dividend of 0.75 pence a share for 2014, its first for nearly six years.

Chief Executive António Horta-Osório hailed the proposed dividend payment as a symbol of the bank's return to normality following a traumatic few years. "Over the last four years we have transformed Lloyds Banking Group into a low cost, low risk U.K. focused retail and commercial bank," he said.

In 2008, Lloyds was bailed out following a shotgun merger with teetering mortgage giant HBOS. It has since slashed its balance sheet and refocused on its British activities. The U.K. government has gradually reduced its holding in the lender from around 40%. The resumption of a dividend could accelerate further stake reductions by the government.

Over the past year, Lloyds executives have held protracted negotiations with U.K. regulators to restart paying dividends. Regulators wanted to ensure Lloyds passed a balance sheet stress test last October before giving the bank the green light. Many analysts had expected Lloyds to subsequently propose a dividend of 1 pence.

"What really matters today is that we started," Lloyds Chief Financial Officer George Culmer said of the dividend. The executives said the bank intends to pay a dividend of 50% of sustainable earnings in the medium term.

The proposed dividend will return around GBP130 million to the U.K. government. U.K. Treasury chief George Osborne said in a statement that he welcomed the Lloyds dividend, and that "all proceeds from these sales are being used to reduce the national debt."

In 2014, the bank's total income, excluding insurance claims, fell 2% from a year earlier to GBP18.37 billion. Analysts were concerned that the bank's net interest margin--the difference between its cost of borrowing and the interest it charges customers--fell in the last three months of the year compared with the quarter before. The bank said it is targeting a higher net interest income number of 2.55% this year. The bank's underlying profit, which strips out a number of one-off items including regulatory provisions, came in at GBP7.8 billion, compared with GBP6.2 billion a year earlier.

Old problems continue to haunt the lender. The bank said it put aside GBP700 million in the last quarter to compensate customers who were wrongfully sold payment protection insurance. It also put aside GBP425 million to cover a range of other regulatory issues.

Lloyds is also bracing for a wave of criticism on executive pay. Mr. Horta-Osório walked away with a package worth GBP10.8 million in 2014 after a large long-term incentive share award came due. "I intend to keep these shares until the government's stake is significantly reduced," he said, pointing out the bank had added GBP35 billion in market value under his tenure.

Write to Max Colchester at max.colchester@wsj.com

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